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The Property Speculator

The Property Speculator

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Indirect Property Investment

Posted on September 25, 2010 by admin

If I stated that property investment requires a substantial amount of
capital to get established, you would certainly not be surprised.
Currently banks and building societies require a significant proportion
of an investment property purchase cost as equity. I hazard a guess
that this situation is generally, highly unlikely to change in the near
future. Investors now fully understand that a property/portfolio that
is based upon a high level of debt is simply too risky. I personally
don't believe this new behaviour to be a bad thing.

So, an example property costs Ł200,000, therefore the mortgage provider
is likely to require you to provide around Ł40,000-Ł50,000 as deposit.
In addition to this-SDLT, management costs and transaction costs must
be included. This amount might be too high for many prospective
investors to enter the market. Investment in this way is known as
`direct property investment'.

Many people prefer to invest in a gradual manner rather than investing
a large amount in one go. It's also very important to many to seek a
`spread' by diversifying their investments within the portfolio.
Diversification might be in several different ways: across property
types, across fund types and across investment types. This leaves them
less exposed to the various risks involved with each investment (all
investments involve an element of risk to some degree).

Property investments enjoy a particular pattern of behaviour owing to
their lack of liquidity, relative attractiveness of tangible assets and
the facility to easily increase their capital value. For an insight
into the particular characteristics of property as an investment class,
look at my other post `why property still makes an excellent
investment'. If an investor wishes to take advantage of this behaviour
but does not wish to invest directly, there are several routes to
consider.
1. UK authorised property unit trusts. This is a collective investment
scheme that invests up to 100% of capital in property. Other
related investments such as limited partnerships can also be
included. Individual units are purchased whose value is directly
related to the value of the assets held by the trust. Unit trusts
are `open-ended', this means that the number of units increases or
decreases depending on whether additional money is invested or
withdrawn by other investors.
2. Unit linked life and pension funds. A number of life insurance and
pension companies have funds that invest directly in property.
Often, they can be one of a range of investment options available
as part of an occupational or personal pension scheme. These funds
primarily invest in the UK, as they are conservative in nature, but
an increasing number offer overseas property investment options
as well.
3. Life bonds. In contrast to most of the other indirect property
investment methods, life bonds are life insurance policies usually
purchased as a single premium product. They are invested in a
`with-profits' or unit-linked life fund. They can invest in both UK
and overseas property. A particular advantage of life bonds is
that the holder can withdraw up to 5% of the bond each year without
a tax charge.
4. UK REITs. A `REIT' is a Real Estate Investment Trust. It is a
classification of property investment company that meet certain
criteria; such as having to distribute 90% of the trusts taxable
income via dividends and 75% of assets must be real estate. The
REIT regulations are intended to ensure the company is primarily
engaged in property investment, rather than in development or other
non-property related activities. Investment into this class is
through REIT company shares. Most UK REITs focus on the UK, though
a few have European investments. This sort of specialisation is a
global characteristic of REITs, and reflects the diversity of
legislation in some countries.
5. UK listed property companies (non REITs). This is an investment in
the purchase of shares in publicly listed property companies that
have not elected to convert to REIT status. This might be because
the company does meet the particular REIT criteria, such as a lower
proportion of their income is from real estate. Most listed
property companies stick to investing in the UK.
6. Offshore UK property investment companies. This is an investment
in the shares of property companies that are listed on the London
Stock Exchange, but are based in the Channel Islands to `escape'
the taxes suffered by UK property companies other than REITs. These
companies tend to focus on a single country for their investments,
although a number have opted for a European investment focus. As
these companies are not UK resident, they are not liable for
capital gains tax on gains arising from the sale of UK property
held as an investment. Profits on UK rent are taxed at 22%, but may
be mitigated, and it is often possible to achieve a true marginal
rate of tax as little as 5%.
7. Investment trust companies. These are investment trust companies,
approved by HMRC, and are listed on the London Stock Exchange, and
primarily invest in UK and global property shares. Many are
resident offshore for tax purposes. Investment trust companies are
exempt from capital gains tax, and provide a low-cost way of
gaining exposure to UK or global property through shares. As a
result, they do not suffer from the cash management issues and cost
/ time constraints that unit trusts incur through investing in
property. They can, therefore, be more flexible in their investment
portfolios and strategies, and may be able to enter and exit
markets much more quickly than investors in direct property in unit
trusts.
8. UK limited partnerships. A property investment limited partnership
is a partnership business that invests in and derives returns from
property. Each partner subscribes capital to the partnership and
receives a share of the returns. Investment levels tend to start
from around Ł25,000 for individual investors but many partnerships
will involve investments of many millions of pounds. Whilst limited
partnerships can invest directly in property, the majority invest
in closed-ended funds operated by professional managers.
9. Property derivatives. Property derivatives are sophisticated
investment products that do not invest in property or property
securities, but whose performance is based on that of the property
markets, as measured by indices. They can track the performance of
any established property index in any area of the globe.
Derivatives can take a number of different forms including:Spread
bets, contracts for difference (CFDs) and exchange traded futures
(ETFs) `Over the Counter' (OTC) instruments such as forwards and
swaps.Most derivatives are only intended for institutional
investors and investment professionals, although certain types of
derivatives, such as CFDs may be available for retail investors,
particularly those based on residential property indices.
Derivatives offer access to property investment returns without
investing in property or property securities, and as a result with
minimal transaction costs. For property professionals they offer
opportunities to hedge or de-risk their direct property
investments.

Investment information compiled with reference to the website of The
London Stock Exchange.

The main advantages of indirect property investment are that the
investor is not `committed' to a single, expensive asset. There are no
management or transaction costs associated with indirect property
investment either.

The investor is clearly free to make the decision whether to invest
directly or indirectly; but as with all investment, risk is always
present to some degree.

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Derivatives, REITs, Unit Trusts | Leave a comment

Why the banks can't win

Posted on September 18, 2010 by admin

This post is a bit of a rant I'm afraid. It's in response to the
constant contradictions in house prices and sales reports, and whoever
is (apparently or supposed to be) to blame for them.

For the last year (at least) there has not been a single week when all
sources of information have actually been in agreement on whether
houses prices are rising or falling. As has been quoted many times -
"the problem with predicting the future is that's impossible". The
fact is that residential property values are fluctuating at the
moment. This means (as far as I can see) that they `want' to slowly
begin to increase (their natural state) but certain factors are holding
them back or restricting a rapid increase in some way. What could that
be? Well, considering the vast majority of prospective property owners
need to borrow to fund their purchase, it would make sense to conclude
that the banks are now limiting their lending. If you regularly read
reports in the papers (especially from the US) you would be forgiven
for believing that the banks do not want to lend at all, and they are
turning away a good 90% of applicants.

We all now know what caused the recession. It was the freely available
level of credit that was underpinned by property values. As
residential (and commercial) property values appeared to be increasing
for so long, many people (and businesses) borrowed continually on cards
and loans; comfortable in the knowledge that it could all be paid off,
simply remortgage their property (what's the harm?) and carry on. All
it took was a realisation by the banks that this level of credit was
going a bit too far, and a subsequent `tightening' of lending criteria
and it all ground to a standstill. The widespread belief that
mortgages were almost unobtainable by anyone, lead to condemnation of
the banks; they had gracefully accepted a huge amount of the public's
money (generously offered by Mr Brown and Mr Darling) and now they
wouldn't give any of it back to us. Bankers were conveniently
demonised by most of society (initiated by Mr Brown, I seem to
remember) as being responsible for the whole thing.

However, I simply do not believe this to be the case. Admittedly this
is due to personal experience and subsequently, I am open to comments
to the contrary. I have several friends and associates who have had no
problems whatsoever in obtaining a mortgage within the last couple of
months. When the banks changed their criteria for providing mortgages,
the vast majority of people affected were remortgaging their property.
In most cases to pay off high levels of personal debt accumulated on
credit cards and through unsecured loans. Only a very small proportion
of the applicants turned-down were actually purchasing a property.
This would suggest (to me) that the new criteria for lending had
generally been introduced to be of benefit and that only those
applicants deemed uncreditworthy were refused. Obviously many readers
are likely to have anecdotal evidence to the contrary, but this I
strongly believe is the case.

Surely, if the banks are to blame to `getting us into this', by being
too generous with their lending, they should be thanked for taking
steps to becoming more choosy with their credit recipients.

I believe that a general `baseline' for property values is the total
build cost. Obviously this is linked to land value which is in turn
linked to completed property values...such is the intricate nature of
property economics. Land values and build costs do tend to be less
sensitive than the completed property values. However we are now
getting down to levels that are more in line with these costs, and so
my opinion (for what it's worth) is that property values haven't really
got much space to fall further (I hasten to draw the reader's attention
to the site disclaimer by the way).

As for these reports in response to property values and markets, the
`natural' state of the property market is a gradual increase;
attributed to the desirability of property ownership and it's
relatively short supply. I believe all the reports should be viewed
with a degree of scepticism and an educated opinion should be formed
over the long term. This approach will enable you to make the decision
to buy or sell with confidence.

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Finding your market before finding your property

Posted on September 13, 2010 by admin

I do not profess to be an expert on business, but one thing I certainly
do know is that the vast majority of first-time business starters do
not put their plans together the right way.

Many, many business start-ups have failed because the founders try to
establish the business in this order:
1. Decide what they can produce.
2. Get the item/service to market.
3. Decide who they will sell it to.

The reason this approach fails so often is that they aren't producing
the item or service to any particular `market'. There is a good chance
that whoever they attempt to sell to isn't actually looking for the
product anyway.

A far better approach to establishing a business is to:
1. Research a market or field to understand it and the people immersed
within it.
2. Learn exactly what shortcomings are evident.
3. Source a solution to that `problem'.

A property venture that makes money for you (let's face it, why else
would you be considering it?) is a business in the conventional sense;
and the second business model above is very appropriate as a base. It
will prove to be an expensive mistake if you buy a development or
investment property, get work carried out and then think about whom to
sell it to. Countless TV property programmes quote the novice
developer as wishing to appeal to `young professionals'. This is all
very well if the property is the right type and in the right area,
however it will not work for the centre of a university district (for
example).

It is so important to be extremely fussy when looking for a potential
property that fits your requirements. In the case of professional
developers, many plots of land will be under careful scrutiny so that
the precise one is eventually chosen that will produce his expected
return. To apply the business model above is very appropriate because
the property will be your `product' taken to market.

All areas will have particular needs in respect of accommodation. They
are also highly likely to have accommodation that just will not sell or
let. The letting agent is the absolute best person you could speak to
when considering the type of property that you are going to purchase as
an investment. If you are intending to develop the property, then
speak to an estate agent in a similar way. The agent will have access
to potential clients that have pestered him for a property to rent or
buy in a certain area (this could be narrowed down to a particular
road). He will no doubt be on the phone to these people on a very
regular basis to provide an update on availability. Therefore, if you
do purchase the `perfect' property that offers exactly what these
purchasers or tenants want, you are almost guaranteed to sell or let
and achieve a good price.

In contrast, the agent will also have an extremely good idea of the
properties that just will not move. These are the ones that appear in
the paper every week with gradually declining prices or rents. The
agent will know exactly which property you should not buy.

The venture must be approached in exactly the right way if it is to
succeed. Several geographical areas can be considered, with the
intention of purchasing a property in one of them. However, the
property type is very likely to differ considerably across the range of
areas. Your considerations might look like these examples:
1. Area A could `carry' more reasonably priced single-person's
accommodation. Therefore the purchase of a large house that stands
a good chance of obtaining consent for conversion into flats would
be a shrewd move.
2. Area B is more upmarket and fairly `suburban'. It would support
more 2 bedroom, generously proportioned flats because the agent
regularly receives serious enquiries after them. Therefore, it
might be sensible to consider a newly-built block of three storeys
with upmarket, well-sized flats.
3. Area C is completely suburban with quiet roads but close to 2 good
schools. In this situation, a plot that could accommodate 2 or 3
new detached houses would be an excellent move.

This is to show that many property types can be considered. It really
does depend on the area and what is vital, is a flexible approach. The
venture is a business and the properties should not be regarded as a
blank canvas to experiment with indulgent interior designs. The aim is
to produce a finished property that will have people fighting to rent
or buy; and yes, this is perfectly possible in the current market
provided you have done your homework.

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Why unfashionable post-war properties should not be overlooked.

Posted on September 6, 2010 by admin

Much of being a successful property speculator is establishing a target
market and tailoring the investment or development property to appeal
to it. Unlike other walks of life, fashion in property tends to come
and go quite slowly. Period properties remain very popular and no
doubt will remain so for the foreseeable future. Meanwhile, many
properties built in the post-war years were not particularly
attractively styled (although generally they were actually built to a
fairly high standard). This lack of popularity often means that in
comparison to period properties, these houses are undervalued.

These unfashionable houses tend to be overlooked by many potential
developers and investors, as they believe they are uninspiring and will
not be occupied or sold easily. This need not be the case. The
appearance of many post-war properties has been changed substantially
to incredible effect.

Consider the following photos:

Erincastle House

"The owners of this house wanted to add more space and improve its
exterior. After an Erincastle Design Consultation, the front
garden was improved, the front door and windows were restored to their
original design and an extra floor was added to accommodate a new
luxury Master en suite. The overall effect is obviously a breathtaking
improvement, increasing the desirability and market value of
the house."

Pictures and text used under permission of Erincastle Exterior Design;
erincastle.co.uk

This amazing transformation was created by exterior design consultants
Erincastle. It's not difficult to see that this programme of
transformation would certainly add value to any investment or
development project and therefore an opportunity to increase profit.
Many residential developers believe that the only way to change the
appearance of a property is to repaint the exterior and tidy up the
garden. It is possible to achieve so much more.

The idea that a house considered by many to be ugly, can be transformed
into one with character means that for now, there are more
opportunities available than many thought. The more work carried out
on a development property, the greater the opportunity to make a
profit. Taking the time to make substantial, tasteful changes to the
exterior is certainly an area that is likely to pay dividends upon
valuation for resale or letting. However, the alterations carried out
should not be too expensive. The cost of the works should still be
substantially less than the expected increase in the property value.

Obviously if the property is within a row of semi-detached or terraced
houses, a dramatic change to the exterior is likely to look rather odd
and create too much of a contrast. Therefore when choosing a
development property, your intended work should be taken into
consideration. The building's original layout, profile and shape will
influence the finished item. A great deal of the property's appearance
can be changed; such as adding extensions, demolishing parts and
altering roof lines.

Popular ways of changing the appearance of a modern property is by
adding additional external finishes to the walls, such as replica
wooden cladding to create the `New England' look. If windows are to
be changed, this also provides an opportunity to change the property
theme, such as sash windows to give a Victorian or Georgian look. One
of the most substantial changes that can be made is a roof alteration.
This is probably the most expensive of all cosmetic works but can
achieve the most substantial change of look. If much of these things
need changing as part of the intended development work, then the
additional cost involved in changing the property `look' might not
amount to a great deal more.

It should be pointed out that under the Town & Country Planning Act
1990, changing the external appearance of a property does correspond to
the legal definition of `development'. Depending upon the amount of
work you intend to carry out, planning consent will almost certainly be
required.

For new-build projects, you might feel that options are limited in
finding designs that don't look too contrived. Erincastle also have
experience in creating designs that genuinely look like listed
buildings: Tower House

"TOWER HOUSE " A NEW BUILD BESPOKE HOUSE DESIGNED BY STEVEN JAMES
TYLER, COPYRIGHT ERINCASTLE 2006.

Hill House

"HILL HOUSE " - A NEW BUILD BESPOKE HOUSE DESIGNED FOR AN UNUSUAL
HILLSIDE PLOT BY STEVEN JAMES TYLER, COPYRIGHT ERINCASTLE 2007

Note: If the property you intend to carry out these works to is listed,
or in a conservation area; it is highly unlikely that you will be
granted permission to change the look of the property. Houses that
fall into these categories might not necessarily be full of charm, but
unfortunately they cannot be changed without the express permission of
the local planning authority.

For further information on Erincastle designs, visit their website:
erincastle.co.uk

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What to look for in an Investment Property Lease

Posted on September 5, 2010 by admin

If you are searching for an investment property that does not require
(much) work to be carried out, there is a good chance that you will
find yourself evaluating a property that has a tenant already in
occupation. Under The Land Registration Act 1925 and 2002, if you
purchase the Freehold interest in a property, you are legally obliged
to honour all existing leases and agreements. In law, the rights of
the person(s) in occupation override that of even the freeholder's.

The terms° of any lease in place on the property will affect its value
to some degree (for example, a poor `quality' tenant in place for the
next 15 years does not represent an ideal situation and subsequently
will be less desirable than a good quality tenant that renews a lease
regularly). The main aspects of any tenancy agreements are:
* Parties involved. All tenants and the Landlords name or company
will be stated on the tenancy agreement.
* Lease term. This is the period of time the tenant is permitted to
occupy the property. This period may be either reduced, extended
or become `open ended' by agreement with the landlord. What
commonly happens in residential tenancies is that the initial term
is set at 6 months. The tenant may then continue in occupation
(with the landlord's approval) for an indefinite period of time,
paying rent on a monthly basis. This is what is known as a
`periodic tenancy'. The frequency of rent payments then becomes
the period of notice for either party to bring the agreement to an
end. For example if the rent is paid monthly, then the landlord or
tenant can give a months' notice to bring the occupancy to an end.
* Rent Payable. This is the sum of money charged regularly by the
landlord so that the tenant is permitted to remain in occupation.
The rent is set initially as the tenancy agreement is created.
Residential tenancies are usually paid monthly in advance;
commercial ones are usually quarterly in advance.
* Deposit payable (if any). This will be stated in both words and
numbers.
* Rent review. This is a clause in the tenancy agreement that allows
the landlord to increase the rent payable so that it reflects
continually changing rent values. It is very common in commercial
tenancies but less common in residential ones. After the initial
rent level is set at the beginning of the lease term, it might be
reviewed at 3 yearly intervals (for example) to increase in line
with the general level of economic inflation. Sometimes these
reviews (most commonly commercial) are `upwards only'; meaning that
the new rent level will be the lowest value of either the existing
rent level, or a sum agreed by both parties as being an accurate
reflection of current rates. In the event of disagreement of this
level, the tenancy agreement will prescribe a method of
establishing a new rent by a third party.
* Break Clause. In place on commercial properties. This is a clause
that allows either the tenant or the landlord to bring the
agreement to a premature end. This is very often subject to around
6 months notice. Landlords sometimes charge a premium to
compensate them for the risk of a subsequent rent void when the
tenant moves out. This has mixed opinions amongst property
professionals, some regard it as justified, and others see it as
completely unnecessary.
* Security of Tenure. This is a legal term that means the landlord
cannot simply evict the tenant. It is now almost extinct in
residential tenancies. Only agreements entered into before the
15th January 1989 are protected (known as Rent-Act tenancies), and
provide the tenant with security of tenure. This has the result of
substantially reducing the property value to around 50% of that in
vacant possession. However, that is not to say that tenants under
more recently drawn up contracts can be evicted on a whim. Far
from it. You cannot evict a tenant without a Court Possession
order. If a tenancy agreement has been in place, it cannot be
substantially changed even if it is renewed. Any new agreement
must be on similar terms. All residential tenancies granted after
the 28^th February 1997 are `Assured Shorthold Tenancies'. This
still provides the tenant with security of tenure, but the landlord
will be granted a possession order on certain grounds after the
initial term of the lease has passed and it has become a periodic
tenancy. The specific grounds for possession are listed in the
Housing Act 1988.

Commercial tenants are automatically given the protection of security
of tenure under the Landlord and Tenant Act 1954 (known as the '54
Act). This means that tenants can only be evicted under particular
circumstances (such as the landlord wishing to occupy the property or
develop it). The parties involved can specifically opt out of this act
if it suits their circumstances. This is known as an `exclusive'
agreement, as opposed to an `inclusive' one. This act can have quite
an effect on the value of the tenancy, for an inclusive agreement puts
the tenant in a strong position and an exclusive one does the same for
the landlord.

When taking on ownership of an investment property with tenant(s)
already in place, great care should be exercised in establishing which
tenants actually should be in occupation. Once the conveyance process
is completed, anyone in occupation of the property (whether they pay
rent or not) is automatically granted rights to remain there. If you
later find out that individuals should not be in occupation, court
action might be required if they will not co operate and move out.

In all leases, there are `implied' covenants adopted. These are:

The Tenant:
* To pay rent as agreed.
* To pay utility bills as required including connection fees.
* To vacate the property upon lease expiry
* To keep the property in good condition and not to commit `waste'
(which is where the tenant allows the property to fall into
substantial disrepair through neglect)
* Not to make any alterations to the property other than with the
express, written permission of the landlord.
* To allow the landlord (or representatives) access to the property
(normally subject to 24 hrs notice) for the purpose of maintenance
or inspection.
* A requirement to report any damage to the property to the landlord
to enable him to repair it or make an insurance claim.
* Not to change the locks on the property with express permission.
* To allow viewings of the property for prospective tenants within 2
months of term expiry.

The Landlord:
* To keep the property in acceptable, habitable condition for the
tenant.
* To allow the tenant `comfortable enjoyment' of the property.
* To insure and keep insured the property against the usual fire and
other risks.
* To return any rent paid to the tenant for any period the property
is not inhabitable.
* To cover any outgoings that the tenant does not pay.

The landlord has the right to enter the property if the rent remains
unpaid for 14 days or more; or if the tenant breaches his covenants or
enters bankruptcy proceedings.

°Note. In property law, the word `Term' (singular) refers to the length
of time of the lease; whereas the word `Terms' means the conditions
contained in the lease agreement that the tenancy is based upon.

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Budgeting for a development project

Posted on August 31, 2010 by admin

It is of paramount importance when planning a property development that
a budget is prepared and followed. Many TV shows feature aspiring
developers that always seem to go over budget because of a combination
of self-indulgent luxuries and a lack of foresight regarding potential
problems. Although I strongly suspect that when filming, sensible and
prudent developers are omitted from the eventual screening because they
don't make for `involving' viewing.

Budgeting is in no way a difficult concept to understand. Private,
novice developers and professionals alike should follow a similar
process when planning projects. It is only the scale that will differ.

When planning a development, the initial method of forming a budget is
to carry out a financial appraisal. This means that a basic plan is
drawn up which sets out how much the project as a whole will cost; and
how that total will be broken down into different aspects such as
building/development costs, fees (estate agents, architects, surveyors,
solicitors (including VAT) and Stamp Duty), and cost of land/property.
As this is only a basic plan, it does not have to be accurate down to
the last penny at this stage. However, the purpose of it is to
establish if the project is financially viable for you.

My favourite method of appraising a development is the `residual'
method. This is simply as follows: Residual Equation

Note: `Gross Development Value' is the total value that you
(realistically) expect to achieve when the finished property is sold on
the open market.

This method allows for the required profit to be placed into the plan.
Profit is something that many novice developers almost forget about
until the finished development is valued. However profit is vital if
your property venture is to succeed. Obviously if the expected profit
level is too high, the plan is less likely to work. Likewise, if the
profit is too low then it leaves you less capital to begin your next
property. On development projects at the height of the market in 2007,
a realistic profit figure could have been around 30% of the Gross
development value (GDV). Currently, a profit of around 20% might be
considered quite optimistic (but still possible).

The next aspect is build/development costs. It is impossible to say
what this will be in the region of, because it will depend entirely on
the scope of the work, the required standard of finish and the size of
the property. Professional property developers, who are building a
property from scratch will usually calculate this on an area basis and
apply a rate per square foot or metre. This method can also be applied
to development properties that are not being built from scratch, but
are having extensive work carried out. This rate could be between Ł30
per square foot (very approximately Ł300 per square metre) for a very
basic job, or up to around Ł100 per square foot for a very top-end
finish. Currently Ł50 per square foot (approximately Ł500 per sq
Metre) might be a realistic figure. So if the development property is
planned to be 2,000 sq ft in area, build costs of around Ł100,000 will
be a `ballpark' figure (depending on scope and standard).

If the work you intend to carry out is not that extensive, then
calculating build costs will not be appropriate. It is more sensible
to get quotes from builders for the work you want them to do. Always
make a list to give to them (keep a copy too!) so that they have a
formal record of your required works. This will form the basis of the
quote that they will provide. Simply explaining to them what you want
is not clear enough; it should be set out on paper. This will also
allow you the opportunity to think about what the builders can do, and
what you can do. You might find that much of the work you have written
down could be carried out by yourself, obviously this will save
money. If you obtain several quotes from builders, you will very
soon form a picture of what is or isn't a fair price for the required
work. If at all possible, always try to get a fixed price deal from
the builder. This will contribute a great deal in forming a budget
that is less likely to change. Be warned however that this fixed-price
deal is certain to contain conditions. A builder will not adhere to a
fixed price if much additional work is added to the plan. This
includes changes of your plan and unforeseen problems such as the need
for more extensive ground works or compatibility problems with
individual build components.

Fees for involved professionals must also be included into the budget.
Solicitor's fees are likely to be around Ł500-Ł1,000 inclusive of
search fees, VAT and a small amount of additional work (phone calls &
letters etc). Obviously this will depend (again) on the scope of the
work the Solicitor must carry out for you. Complicated legal matters
will certainly result in the fee increasing.

Estate agents fees should not be more than 1% of the sale price. The
estate agent might attempt to convince you that you should pay more for
a `top-rank' service; this is definitely not the case. Most estate
agents will acknowledge that 1% is competitive and they can still
afford to provide you with an excellent service on this fee.

If the development project is a new-build property, then you might be
considering the services of a Project Manager. The fee for this is
likely to be from a couple of hundred pounds for a `phone/email based'
service, up to Ł5,000 or more for a dedicated service by a Project
manager who can source the best materials at the best price and even
find suitable temporary accommodation for you.

All these elements can be used to provide the vital components to your
project appraisal. In these financially troubled times, if you're
looking to secure lending to help finance your venture, that lender
will be far more inclined to consider your request if it is clear that
an appraisal has been produced to establish the project's financial
viability.

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Getting Started in Property Investment & Development

Posted on August 17, 2010 by admin

Many people dream about becoming a full-time property developer or
investor but simply don't know where to start.

The first step is to decide which approach suits you and your
circumstances. Do you want to be a developer or an investor?
* A Developer looks for a suitable property that is in need of work
(to a lesser or greater degree). This can be purchased at auction,
through an estate agent in the conventional way or quite often the
owner is approached and a deal is struck. The work is carried out
over a period of between 6-18 months and the property is put back
on the market, hopefully to be sold at a healthy profit. Being a
developer offers the shortest route to making money through
property as you have the best opportunity to increase the value.
* An Investor will sometimes buy a property with a tenant already in
place. To be purely an investor in property (as opposed to an
investor/developer) would mean that the property is purchased with
no intention of carrying out any works, just getting an occupant in
as quickly as possible so that an investment return in the form of
rent is provided. This situation is unusual as most landlords
understand that some work is likely to be needed before
occupation. This approach is more passive than being a developer.
Be aware though, it is unlikely that you will see much financial
return in the form of profit for several years. Most landlords
only make enough to cover the mortgage, management fees and tax.
The benefit comes in the years ahead when the capital value of the
property has increased considerably. Using this method is likely
to take 10 years or more to see a significant increase in your
investment.

The next step is to realistically look at your finances. Obviously
buying property is never cheap, and it is probable that you will
require a mortgage. At the time of writing, the majority of mortgage
providers ask that you provide a deposit of around 20%-25% of the
purchase price (or the total development price if your plans are more
ambitious). You will also need to cover fees at the point of purchase
(estate agent and solicitor with added VAT) and Stamp Duty. Once the
property has been purchased, if it is a development project there will
be a period where the work is being carried out and you have to meet
mortgage repayments. This should be factored in. If it is an
investment property, then rent voids must be allowed for (when no
tenant is occupying it and subsequently no rent is being collected).
Management costs must also be considered, such as garden maintenance,
decoration and general property upkeep.

In common with a conventional mortgage, lenders will want to know what
other borrowing you have, such as credit cards and loans. Mortgage
providers are very keen to minimise risk and they will feel that if you
are committed to other lenders, your ability to meet the mortgage
repayments will be compromised. Also remember that mortgage interest
rates can fluctuate a great deal, this will have a substantial
influence on the monthly repayments.

Many property investors opt for an interest-only mortgage. This
obviously means that the capital must be repaid at the end of the
mortgage term and the only way to do this (realistically) is to sell
the property. The difference between the selling price and the amount
of the original mortgage is the profit. This is a bit of a gamble, as
it's impossible to accurately predict what the property will eventually
sell for.

The deposit required to proceed with the purchase should be carefully
considered. This might sound strange, as it's clear that the higher
the proportion of deposit compared to the amount to be borrowed will
result in more profit and lower risk. While this is largely true, it's
not quite that simple. There is an optimum level of equity (money that
is not borrowed) that will result in the best return and the most
advantages:
* The level of equity is high; if the venture is being run as a
limited company, then tax will be payable on any profit gained.
It's also not good business sense to put so much equity into a
single investment. For example if Ł100,000 of equity is available,
it would be better to place Ł50,000 of equity into each of 2
properties rather than all of the equity into a single property.

* The level of equity is low; this situation leaves you very exposed
to risk in the form of interest rate fluctuations (and subsequent
high repayments) and rent voids. It could be argued that this
aspect contributed to the credit crisis because borrowers left
themselves far too narrow a financial margin.

The next step is to consider the market you wish to appeal to. On the
property-related TV shows, the developers always seem to concentrate on
the `young professionals'. This market in itself could be sub-divided
into several smaller categories. However, do not overlook the other
markets such as students, retired people and `downsizers'. It is
important to consider the market before purchasing the property; it is
always easier to provide a product for an established demand, rather
than developing the product (the property) and then wondering who is
likely to use it. Always do your homework, for example if there is a
strong student population but a shortage of accommodation......it's
fairly obvious which type of property you should provide.

Get to know your target market intimately, do they own cars or use
bicycles or public transport? This will affect where it is best to buy
the property and if you need to provide a garage. Alternatively, you
might be able to convert an attached garage to increase the floor area
of a large house; thereby providing another student flat. If your
target market is downsizers, will they need a large garden? Or a lot
of storage space?

Information on an area's demographics is available from the Office for
National Statistics (statistics.gov.uk). Although it tends not to
provide very detailed data, it is a good starting point. The other way
to get to know what is in demand in your chosen area is to speak to
letting and estate agents. They will have an excellent idea of what is
always being enquired after but supply is scarce.

One last thing for now, it is highly recommended that you look for a
property close to where you already live. You have a much better feel
for values and know whether a property is priced too high. It is also
far easier if you have to attend site regularly to deal with builders,
Architects or Project Managers.

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Questions to ask your Conveyance Solicitor

Posted on August 14, 2010 by admin

The conveyance procedure can be a bit of a mystery to many property
purchasers. A good solicitor will talk you through the conveyance
process and provide fairly regular updates as the different stages are
reached. A bad solicitor might not bother to keep you informed (he/she
might simply be too busy) and not return your calls. Subsequently
purchasers feel helpless and frustrated and this adds to the sense of
being `kept in the dark'. Don't underestimate the amount of stress
generated when this happens.

Property conveyance can be defined as:

"The legal transfer of an interest in property"

This process can vary a great deal in the time it takes to complete and
might range from a couple of weeks to several months, although the
average time taken is 10-12 weeks. This depends upon the efficiency of
all parties involved and the size and difficulty of the task (there
might be complex legal issues that need to be resolved before
continuation, or financial issues such as mortgage complications).

The two milestones involved in conveyance are Exchange of Contracts,
and Completion. In England and Wales, at the point of exchange of
contracts, the seller's Solicitor should have done the following:
* Received a copy of the title deeds
* Obtained Land Registry office copies relating to the property
being sold
* Prepared the draft contract
* Negotiated a completion date (which is included in the contract)
and been in regular contact with the other party's Solicitor to
answer questions.
* Carried out a `search' which establishes if the property is
connected to mains services, if any covenants run with the land and
if there is any aspect of the purchase that his client (you) should
know about.

Once the finalised contract has been drawn up, signed by the seller and
exchanged with the other party's solicitor, this is the point of
contract exchange. Both parties are now legally bound to proceed with
the transaction.

The second phase of conveyance ends at the point of completion. The
solicitor must:
* Request a redemption figure from the seller's mortgage provider
* Swap copies of the transfer deed with the other party's Solicitor
(respectively signed by seller and purchaser)
* Finally, pay himself, the estate agent and send any outstanding
amounts from the sale to the appropriate recipient.

In Scotland, the transaction become legally binding at a much earlier
point. In common with contract law, if the initial offer is accepted
it becomes legally binding. This means that the survey is carried out
before the initial offer is made. This system seems to have more
advantages than the English system.

Solicitors carry out many, many conveyances. Unfortunately this
sometimes means that they communicate with their clients using too much
legal terminology. Many purchasers are never in a position where they
understand fully what is going on throughout the whole process. A good
solicitor should speak to you as an equal, and explain properly what he
will be doing for you (after all, you will be paying him to do a job),
what he requires from you (such as building work warrantees and proof
of any planning consent granted) and how long the process is likely to
take (although this can only be a very rough estimate).

Having worked on the `other side' as a property professional, I would
like to take a moment to defend solicitors. As mentioned above,
property solicitors carry out a great many conveyances. Some go
according to plan, many do not. Some legal issues can be extremely
complex, especially when it comes to involving other parties such as
planning authorities or other solicitors in `the chain', this takes
time. Most solicitors' workloads are heavy; it is easy to forget that
other clients also need updates on the progress of their conveyance.
The solicitor might not have any update to report back to you.
Remember, in some cases phone calls and letters will end up costing you
extra. That said, there is no excuse for poor service.

By all means when looking to appoint a solicitor, use the internet.
However, do not overlook word-of-mouth either. If a solicitor has done
a good job for one person, the chances are he'll do just as good a job
for you. If you do use the internet, a good place to start is The Law
Society (lawsociety.uk). There are many adverts on the
internet advertising very cheap conveyance; this means that you don't
have to settle for sub-standard service just because you don't intend
to pay a fortune. There are also many websites that provide the
facility to read reviews of solicitors.

Once you have found a solicitor that you feel will provide a good
service, you should formally appoint him. This means that you should
send a letter to the practice (or more likely these days it will be an
email, this is perfectly acceptable) stating that you wish to appoint
him/her to carry out the conveyance on your behalf. At this point,
there will (should) be questions that you need answers to:

How much will Solicitors' fees be?

It's definitely a good idea to look for a fixed price arrangement. For
the actual conveyance part, you will be charged somewhere from around
Ł250 to Ł400 (plus VAT). In addition to this you will be charged for
the Land Registry Fees, Search Charges and Transfer Fees. All in, a
total fee of Ł600-Ł700 (plus VAT) is likely. There are so many
services advertised on the internet for around Ł100 + VAT. It's less
likely that you will receive a good quality service for this amount.
Also be aware that any service carried out by the solicitor that is
above and beyond the service agreed to, is almost certain to be charged
extra.

What type of survey should I opt for?

It is highly recommended that you obtain a survey on the property you
want to purchase. Your lender will already require a valuation survey
which is only to establish that the property value is in line with what
you intend to pay and the amount you are borrowing. A Homebuyers
Survey is the next step up and the most frequent option for property
buyers. It covers the general condition and standard of maintenance of
the property and any recommended actions that should be carried out.
The most detailed report is a Building Survey. This is a comprehensive
study of all aspects of the building. It will include the property
condition, any defects found, the cost of remedial actions,
environmental information (such as the likelihood of flooding) and the
results of tests for woodworm, damp and dry rot. Clearly it is the
purchaser's decision which survey is carried out. The more detailed
the study, the more expensive it will be. A full Building Survey is
likely to cost in excess of Ł400. Also, if the intention is to
completely `gut' the property to a bare shell, is it worth a full
building survey?

Do I need to be concerned over SDLT?

Stamp Duty Land Tax (SDLT) is (currently) payable on all property
purchases over Ł125,000. Between Ł125,000 and Ł250,000, 1% of the
property value is currently payable as SDLT. For first time buyers in
this band, the SDLT rate is still zero. If the purchase price of the
property is between Ł250,000 and Ł500,000, then 3% of the purchase
price will be payable. And if the purchase price is above Ł500,000 the
SDLT rate is 4% of the purchase price. The form can be filled out by
your solicitor; but be warned, they are highly likely to charge extra
for this (probably around Ł60-Ł100). More information on SDLT is
available from the HM Revenue & Customs website
(hmrc.gov.uk/sdlt/index.htm).

Is there anything I need to pay up-front for?

It is likely that the solicitor will ask you to pay up-front for the
search fees, as this is sometimes done at the beginning of the
conveyance.

If a deposit is payable, this will be asked for just prior to the stage
of contract exchange. There are very strict guidelines governing what
solicitors can do with this money once it's in their possession. If
any interest is payable on it during the period, it's illegal for the
solicitor to retain it.
__________________________________________________________________

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Interest Rates and how they Effect You

Posted on August 6, 2010 by admin

Interest rates are currently at an all-time low. This obviously makes
it very cheap to borrow money in the form of a mortgage. However, many
mortgagors (borrowers) do not fully understand the influence of
mortgage interest rates on the payments they are obliged to make
each month.

The Base Interest Rate in the UK is assessed every month by the Bank of
England's Monetary Policy Committee. Many factors are taken into
consideration when deciding whether to reduce, maintain or increase
it. One major influence is the rate of inflation or deflation. The
interest rate is varied to regulate consumer demand; if the rate is
increased then goods and services appear more expensive and subsequent
demand reduces. This ultimately tends to ensure that price inflation
is less likely. If the interest rate is reduced, then prices appear to
be cheaper; this is used to stimulate consumer demand.

The other side to fluctuating interest rates is the effect they have on
savers. If interest rates reduce, it might stimulate the retail aspect
of the economy but investors will be less inclined to place their
capital with the banks as the rate of interest the investors receive
will be poor. Likewise if interest rates increase, savers will be more
inclined to leave money in a savings account because of the more
favourable return.

Another influence on interest rates is LIBOR (pronounced Lybor) which
is an abbreviation for `London Inter-Bank Offered Rate'. This is the
interest rate that banks use when they lend money to each other. This
rate of interest is announced daily and is determined by the money
markets in London. The behaviour of LIBOR can provide the banks with a
useful indicator of a forthcoming interest rate change. If LIBOR is
significantly above the bank base rate, then it can be a sign that the
base rate will increase. If LIBOR is below bank base rate, it might be
an indication that the markets feel that the base rate will decrease.

These changes in the Bank of England base rate directly effects
borrowers. Mortgage providers (mortgagees) usually arrange Variable
Rate loans at around 1%-2% above the base rate. If the base rate goes
up, a mortgage is also likely to increase by the same rate. Although
this is not `set in stone'; it is up to the mortgage provider to pass
on reductions or increases.

A Fixed Rate mortgage is often used by landlords, as it is very easy to
budget and plan for repayments into the future. Landlords that have
access to this facility are often recommended to fix the rate for as
long as possible e.g. If this term is 25 years; then that's 25 years of
mortgage repayments that will not change over time. Although in
practice, it is highly unlikely you will find a mortgage provider that
provides this for a period longer than about 5-10 years.

A Tracker Rate mortgage will closely shadow the base interest rate and
stay around 2%-3% above the base interest rate. This allows the
borrower to take advantage if the interest rates drop, though it will
get expensive if the interest rate increases by a great deal.

On a typical repayment mortgage, the borrower pays a particular sum
each month which covers a percentage of capital but is mostly made up
of interest (though this ratio will change as the term of the mortgage
progresses). So for example, if a total monthly mortgage payment is
Ł1,000, this might comprise Ł750 in interest and the remaining Ł250
goes towards paying off the capital. The amount of interest paid
depends upon the amount of the loan still outstanding and the interest
rate applied to it. The capital portion of the repayment depends upon
the amount borrowed and the term of years the mortgage is to be repaid
back over (for example 20 years). So if a borrower makes overpayments,
this reduces the capital aspect of the loan far quicker and therefore
substantially shortens the mortgage term and therefore the total amount
of the mortgage.

The following tables offer illustrations to compare the effect on
monthly mortgage repayments when the interest rate varies. Far too
many property speculators and conventional homeowners do not consider
the effect that a substantial rise in interest rates would have.

10 Year Mortgage Rates

15 Year Mortgage Rates- 20 Year Mortgage Rates 25 Year Mortgage
Rates-

These tables show the difference that a significant change in interest
rates would have on mortgage repayments. Almost all mortgagors would
experience difficulty to some degree if rates increased, however some
element of flexibility should always be considered.

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What is the Best Time of Year to Sell a Property?

Posted on July 29, 2010 by admin

If you are planning to put a property on the market soon, you obviously
want to give yourself a fighting chance of obtaining the best possible
price. Timing is important when selling property, but is it quite as
important as many would have you believe?

Traditionally, the best time to sell a house is between January and
July. This is because buyers feel generally optimistic because of the
approach of spring and summer. Houses can look very attractive when
the gardens are in full bloom, and potential buyers tend to spend more
time outdoors and so tend to `notice' properties for sale. Make sure
that your property is listed for sale by April to take advantage
of this.

The summer holiday season then slows things down. This is because
buyers are more concerned with holidays and looking after children who
are off school. Sales that are already going through during this time
will also be more likely to `drag'. Members of staff of Estate Agents,
Solicitors and mortgage companies are likely to be off work at some
point during this period. Your case is unlikely to be looked at during
their absence.

September then typically displays a small surge as buyers start
thinking about spending Christmas and New Year in a new home. This
`blip' will tail off around October as buyers know that the purchase is
unlikely to be completed by Christmas.

Although this market behaviour is generally typical, will it really
have an effect on the property's value? Obviously more potential
buyers will result in a more competitive situation; this has the effect
of supporting a strong price. The fact of it is that there are
certainly more buyers around at certain times of the year, but likewise
there are always people who are looking to buy regardless of the time
of year.

An associate of mine indulges in what is known in the U.S. as
`flipping' homes. This is simply buying a scruffy property at a
discount and living in it while the property is lightly renovated in
preparation for selling on again. He placed it on the market in
November and received very little interest. He waited patiently
through December with similarly scarce viewings. However, literally 4
days after New Year, the market went (his words) `ballistic'. The
deal was done in a matter of weeks.

Housing is currently in short supply; subsequently many buyers are
resigned to waiting many months or even a year or two for the `right'
property to come along. As long as you know the type of buyer you wish
to appeal to, you might be able to market the property accordingly to
good effect.

There is also a theory that suggests completely contradicting the
conventional approach. When better (in theory) to sell a property than
when there's hardly any competition? Also, winter buyers are less
likely to be flaky and pull out of the sale.

There are many who believe that the seasonal cycle of the residential
property market is vital to maintain its health (which seems very
logical to me). And that house prices will tend to fluctuate between
about +3% and -1% of the average according to the season. On the
website houseprices.uk, historical data is provided to
strengthen this concept:

"House prices vary seasonally between -2% and +1% in a way that
reflects seasonal changes in demand - it leads to a sharp dip at
Christmas and the New Year with a broad peak during June-July.

This can make it difficult to interpret the monthly changes in house
prices in terms of either trends or irregular volatility, so it is
standard practice to report house prices seasonally adjusted, or SA.
The correction shown is the % change added to the NSA prices to get the
SA ones. The level of seasonal adjustment is an excellent indicator of
the annual `breathing' cycle of the housing market, and hence its
health."

Seasonal Adjustment
Ultimately, much depends on your property. If it is in a sought after
location, you should have no problem selling at a reasonable asking
price regardless of the time of year or market conditions. Then again,
if there are strong reasons that may put buyers off the property, these
are likely to be valid objections regardless of demand level. But it
does no harm to maximise your chances of success.

There is much you can do to increase the likelihood of a prompt
property sale. A well-kept garden, pathway and fence, plus a freshly
painted front door are immediately appealing, whereas a scruffy outdoor
space with a litter bin outside the front door may turn many
prospective buyers away.

It is important to reduce `clutter' in the house and present a clean
property. Natural colours and lamps (rather than bright, stark
overhead lights) are very effective at making the property feel
`welcoming'. All minor maintenance jobs should be completed. The
individual rooms should be `defined' properly. This means that it
should be obvious that the room has a specific purpose.

The rules to stick to when selling property are:

1. Put the property on sale at a realistic price
Most property owners have an idea of what their houses or flats would
fetch on the open market. However, be aware that the asking price and
the actual sale price are very often different sums.

2. Put the property on sale at the right price.
If the property is placed on sale at too high a price, many potential
purchasers won't even consider it because they assume that the price
will not be reduced by a great deal. Also, many people simply feel
uncomfortable negotiating a big reduction in price. If the property
goes up for sale at too low a price, then financially you'll lose out.

3. Try to avoid being in a chain.
The longer the chain of vendors and purchasers, the more likely
something will go wrong. This might be a seller withdrawing a property
higher up the chain or even something happening further down the
chain. Either way, things will normally grind to a standstill.

4. Choose your estate agent carefully.
There is seldom a reason why you should have to pay more than 1% of the
selling price for the estate agents fees. Try to avoid a period of
exclusivity that seems too long, you should be able to give a week's
notice in writing to end the contractual period. Speak to the agent
about the area your property is in. They should know it like the back
of their hand. If they don't, then it does not bode well.

5. Make sure the property is well presented.
A well-painted front door and a tidy garden go a long way to ensuring
the property makes a good initial impression.

6. Adopt a pro-active approach to selling the property.
Make sure that you know exactly what type of purchaser the property
should appeal to. If it is a family home, carry out some research into
local schools and transport.
Make regular contact with your estate agent, remember they are working
on your behalf and should always be acting in your best interest.
Feedback from viewings can be a very valuable source of information.
There might be something putting off buyers that are quite easily
rectified.

Transactions can fall through at any time, so your property should be
marketed right up until a fairly advanced stage of the deal. If it
falls through and marketing has ended, you will have to start all
over again.

7. Try to exchange contracts as soon as possible
This is the point where both parties are legally bound to adhere to the
transaction. When the contracts are exchanged, both parties are
committed.

Ultimately, no one really knows what the property market is going to
do. If you hang on for what you think might be a good season to sell,
the market could have dried up even more.

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